Stocks kicked off the third quarter with a nice rally, with the S&P 500 closing just below the much talked-about 1,975 area and the Dow Jones Industrial Average within striking distance of 17,000. Even the small caps, as measured by the Russell 2000, which lagged for most of this year, made a new all-time high.
Hard disk drive and digital data storage company Seagate Technology (Nasdaq: STX) rallied 3.6% Tuesday in a technically significant move that opens it up for an additional 5% to 6% move in the near future.
Considering that the market is still strongly trending higher, going long STX is technically going with the trend. But because I fear we are nearing a cyclical top, I want to validate the trade setup with more than just a good-looking chart.
Tuesday's rally in STX was the result of positive comments from Brean Capital, which reiterated its "buy" rating and $70 price target. The firm sees "material" earnings upside and is bullish on the stock in the short and long term. (My colleague Marshall Hargrave is only slightly less bullish on STX, which incidentally pays a 3.1% dividend yield.)
Additionally, rumors circulated last week that Seagate may be among the companies interested in bidding for memory-based storage systems supplier Violin Memory (NYSE: VMEM).
With a positive news backdrop, let's turn to the weekly chart, where we see STX is in an orderly multi-year uptrend.
When the stock overheated and burst out of the channel in January, it promptly got called back. In May, STX retested the lower end of the channel for the first time since August, meaning it had undergone a good consolidation period, which then allowed it to rebound.
On the daily chart below, note that when STX retested the lower end of the multiyear uptrending channel, it also bumped into its rising 200-day moving average (lower blue line) for additional support.
The gains since then have been steady as the stock pushed back above its medium-term moving averages.
Over the past two weeks, STX consolidated in a bullish wedge pattern, which resolved to the upside with Tuesday's rally. With near-term momentum on the bull's side, shares should revisit the January highs.
Risks to Consider: With an end to this cyclical bull market possibly around the corner, it is more important than ever to have a trading plan in place -- and to stick to it. Take technical signals, use stops and don't get greedy.
Action to Take -->
-- Buy STX above $58.50
-- Set stop-loss at $57
-- Set initial price target at $62.10 for a potential 5% to 6% gain in 2-4 weeks
This article was originally published at ProfitableTrading.com:
Make Quick Profits on This Stock Before the Bull Market Ends